DoL Fiduciary Critics Aim to Narrow Definition

WASHINGTON -- Critics of the Department of Labor's controversial fiduciary proposal are working overtime to stoke industry opposition to the initiative in the hopes of narrowing the scope of the regulation or, better still, defeating it altogether.

A panel of prominent figures in that debate -- all opponents of the proposal -- gathered here at the Insured Retirement Institute to outline their critique of the Labor Department's plan to impose fiduciary responsibilities on advisors working with retirement plans or individual plan holders.

Steven Saxon, who chairs the Groom Law Group of Washington, explains that a principal concern is what he considers the expansive sweep of the rules, applying rigid fiduciary standards under the ERISA statute to even casual, commonplace interactions with investors.

"When you look at this proposal, you need to focus on the definition, you need to see and feel how broad the definition of fiduciary investment advice is in the proposal. It seems to us that it covers almost all routine sales activities," he says.

"Any change that we can get to the definition will be worth a thousand-fold what we get for anything else. This is one of the areas we really need to focus on," he adds. "The idea that just almost any conversation that you have or suggestion you make is going to be fiduciary is outrageous."

Supporters of the DoL's proposal -- and there are many in the investor advocacy community -- argue that the rules are needed to guard against conflicts of interest that too often entice advisors to steer investors into retirement accounts that carry heavy or hidden fees, and might not be in the client's best interest.

The Labor Department is currently collecting comments on its proposal, and intends to hold a public hearing on the matter in August.

CALL TO SPEAK OUT

Saxon urged attendees of the IRI's conference to make their voices heard through that process, and not to rely on the industry trade groups to do all the talking. He notes that the AARP is organizing a campaign in support of the rules, which he hopes to counter with a strong showing of opposition from the industry.

The Department of Labor's fiduciary proposal has been controversial from the start. The department initially floated the idea in 2010, but withdrew that first framework amid intense industry opposition. DoL staffers then set to work on redrafting the proposal, pledging that the second version would include a more rigorous economic analysis examining the costs and benefits of the regulation. Then, in February of this year, President Obama threw his weight behind the proposal in a speech at the AARP, what Saxon notes was a rare high-profile endorsement of a DoL regulation.

BURDENSOME

Critics of the latest proposal that the Labor Department has put forward expect that the disclosure requirements would entail a substantial compliance burden, and contend that the provision requiring advisors to enter into a contract with clients to take advantage of an exemption under the rules would be at best impractical.

"I think we all support disclosures. We think it's important that brokerage consumers understand how their broker is compensated, what they're paying, what their role is, what the standard is what the conflicts are," says Michelle Kelley, senior vice president and associate counsel at LPL Financial. "We just really need to make clear to the DoL that the disclosure obligations [must be] workable."

Mark Quinn, director of regulatory affairs at Cetera Financial Group, argues that the best-interest contract exemption, which would permit firms and advisors to continue to operate under flexible compensation models so long as they make a series of disclosures and commitments to provide best-interest advice and mitigate conflicts, will be the only practical channel for advisors to continue to operate.

"You should assume that if you are operating in the retail space you're going to need to rely on the best-interest contract exemption," Quinn says, though he cautions that the rule as written could compel firms to secure a contract with a client before offering them a cup of coffee. "This is just not generally the way business is done."

The Labor Department has indicated that it is receptive to feedback from industry on its proposal, saying that it will evaluate all the comments interested parties submit and likely tweak the final rule based on that input.

Secretary Thomas Perez defended the department's initiative earlier this month at a House hearing, telling lawmakers that the rule is a needed investor protection, and noting that it doesn't prohibit commission-based transactions or any other common business practice.

But Saxon expressed some frustration at the way that the DoL has been conducting the process of drafting the rule. He is appealing for more transparency and assurances from the department that the final regulation will be workable for the industry.

"Don't keep it a secret," he says. "Because if you keep it a secret people like me will never stop trying to kill the reg."